I’ve just seen a TV programme about three single mothers being homeless and the utterly filthy way they are treated by their local councils. (BBC one March 3rd 2015 – ‘No Place to Call Home) see it here:

One woman & her two kids had been forced to leave the privately rented flat she was renting because the boiler broke and the typically nauseating private landlord simply refused to mend it. So this single mother arranged to live with her own mother in the mother’s council house.

But the council found out and told the mother she would be evicted from her own council house herself if she continued to allow her daughter & two kids to stay with her as the council said that made the council house overcrowded.

As the threat from the council now meant the mother, daughter and two kids would all be thrown out on the streets to be homeless by this spiteful and vindictive council, the mother had no choice but to tell her own daughter to leave.

This made the daughter and two kids ‘street homeless’- they had absolutely nowhere to go except live on the streets because they could not find private accommodation they would be able to afford quickly enough, if at all, as rents were nearly all far higher than they had any hope of being to afford – even if they received ‘Housing Benefit’.

Housing benefit has been cunningly arranged by this disgusting Tory Government to be too low for tenants receiving it to have much hope of finding any privately rentable accommodation.

So, this single mother is obliged to inform the council she and her young children will be on the streets, and could the council therefore re-house her as the law says it has a legal obligation to do.

No, said the council. We know we have a statutory duty where an Act of Parliament says councils have a legal obligation to house homeless parents with children, but we’re not going to. And we’re not going to because part of that same Act of Parliament says that if a person has made themselves ‘intentionally homeless’ we are allowed to refuse people we would otherwise have a legal obligation to re-house.

So we are telling you, single mother with two young kids, that we think you are intentionally homeless and you can go F**k yourself; we’re not going to house you.

The Council used the Alice in Wonderland logic that this single mother was “intentionally homeless’ because she had ‘voluntarily’ left ‘her previous accommodation’ the privately rented accommodation with it’s broken boiler the private landlord refused to mend with winter approaching.

The council seemed to have a convenient memory lapse in forgetting it was the council itself which had forced her own mother to evict her daughter, throw her out onto the streets with her kids by threatening to make all of them homeless by taking the council house away from the woman’s own mother. This is a brutally corrupt piece of pure Kafkaesque wickedness on behalf of the council.

Another single mum with three kids had been evicted by her private landlord as revenge because she had asked him to do essential repairs like stop the excessive dampness which was making all the walls and ceilings covered in black mould – which is dangerous to health as it produces lung disease. She was intentionally homeless too, said the council.

I know of another single parent evicted from their house by the fraudulent USA bank Lehmans, who went bankrupt after causing the recent World wide recession by their criminally dishonest, immoral, grasping and evil banking activities.

The council told that parent too they were ‘intentionally homeless’ on the grounds they shouldn’t have bought their house several years previously by using a mortgage as ‘they ought to have known they would be unlikely ever to work again because they were a single parent’.

I know the councils up and down the country are actually breaking the law ( I’ve checked the legislation) by using this ‘intentional homeless’ nonsense in the way they are, but more of that later.

Then I saw today’s (8th March 2015 BBC) news rabbiting on about the sixty thousand homeless people in New York right now, enduring the coldest winter weather, lots of ice & snow, for decades. New York is always very cold in winter anyway, so this must be awful if you’re living on the streets.

Then the news item featured a single mum in her early thirties working in the financial industry who still didn’t earn enough to afford the stratospheric rents of New York, so she was sharing hostel accommodation with other homeless families.

This housing crisis is almost entirely caused by the banks ramping up the price of housing so they can lend ever larger sums of money. Housing in the UK is now about eleven times an average salary instead of the three times it was in about 1970 – before the greedy banks got into the business of mortgage lending by destroying most of the building societies.

That would cost £91 200 to build, plus the extra cost of buying the land on which it stands. Agricultural land averages about £10 000 at the moment and with at least 16 tiny little rabbit hutches to the acre the land should cost a miniscule £62 or so, and it did a couple of generations or so ago.

But of course today, the bureaucracy and corruptions of the entire housing market and in particular that Orwellian gem of corruption ‘planning permission’ has made a nonsense of land value to build housing on and consequently it can cost millions per acre.

Apparently the average cost land with building permission per acre is now about £800 000 which makes one building plot to build a tiny rabbit hutch of a house on with the average of 76 sq metres for this type of house, is now about £50 000.

So after adding that extortionate £50 000 cost of the building plot to the build cost of £91 200 we get the total cost of a new house for £141 200. Actually the average price is about twice that at present. That will be the £141 000 profit for the house builder then !

But, whatever the price new, shouldn’t the cost of a second hand house decrease at least a bit over time just like other second hand, used goods ?

Errrrrr, yes, I should think it ought to and certainly did before property started to become a good wheeze for Spivs & speculators from about 1950 onwards.

So, take my ordinary four bedroomed London terrace house of 200 square metres which would cost about £240 000 to build new today, plus the average cost of £50 000 for the plot of land, that would be £290 000 built new today. But actually the current value is about £1.4 million.

Anyway, back to the real cost of building it at £290 000. If the house lost just one half per cent a year in value ( about £1500 in the first year) the 135 year old house would have lost 67% of its original cost and would be about £194 300 to buy today. Or that rabbit hutch house costing £141 200 today would cost about £94 604 when 135 years old; (except it will never get to be 135 years old because that type of house is generally built so badly & shoddily it is unlikely to have life of barely more than 20 years).

So this example means over a theoretical life of a house off 200 years each inhabitant pays a modest half percent cost of the total building cost which is £1 500 a year towards the building cost of the London house costing £290 000 to build in 2015. But instead, if you rent that same house today in London you will be paying the 6% of the 2015 ‘value’ the house has of £1 400 000 that landlords expect to rent homes out to tenants for and this will be a cool £84000 a year rent you will paying instead of £1500 previously mentioned.

That’s what it used to be like for centuries until the modern era, when the banks made houses repositories of value, rather than real homes to live in.

Bastards !

So, what with the builders building revoltingly cheap and nasty miniature homes too small even to contain normal necessary possessions and making extortionate profits of up to 100% and even higher, and the banks making billions of pounds out of expensive, often rip-off loans to people to buy homes, the entire country is in the icily corrupt grip of a bunch of thieving sharks really. And at the bottom are the people being forced to live on the streets or in repulsively inhumane council ‘emergency accommodation’.

The same banks that caused the financial crisis currently have the power to create 97% of the UK’s money. They’ve used this power recklessly, putting most of the money they create into property bubbles and financial markets. And now they’re back to their old ways.

We need a change. The power to create money should only be used in the public interest, in a democratic, transparent and accountable way. The 1844 law that makes it illegal for anyone other than the Bank of England to create paper money should be updated to apply to the electronic money currently created by banks.

Banks create new money, in the form of the numbers (deposits) that appear in bank accounts, through the accounting process used when they make loans. In the words of the Bank of England:

“When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created.” (Bank of England Quarterly Bulletin, 2014 Q1)

Conversely, when people use those deposits to repay loans, the process is reversed and money effectively disappears from the economy. As the Bank of England describes:

“Just as taking out a loan creates new money, the repayment of bank loans destroys money. … Banks making loans and consumers repaying them are the most significant ways in which bank deposits are created and destroyed in the modern economy.” (Bank of England Quarterly Bulletin, 2014 Q1)

When new money is created, it should be used to fund vital public services or provide finance to businesses, creating jobs where they’re needed, instead of being used to push up house prices or speculate on the financial markets.

It is based on the proposals outlined in Modernising Money (2013) by Andrew Jackson and Ben Dyson, which in turn builds on the work of Irving Fisher in the 1930s, James Robertson and Joseph Huber in Creating New Money (2000), and a submission made to the Independent Commission on Banking by Positive Money, New Economics Foundation and Professor Richard Werner (2010).

Taking the power to create money out of the hands of banks would end the instability and boom-and-bust cycles that are caused when banks create too much money in a short period of time. It would also ensure that banks could be allowed to fail without bailouts from taxpayers. It would ensure that newly created money is spent into the economy, so that it can reduce the overall debt burden of the public, rather than being lent into existence as happens currently.

PDF Download:

Problem: Around a third of the money created by banks goes towards mortgage lending (and a further significant proportion goes towards commercial property). This creation of money to buy pre-existing assets (i.e. houses in limited supply, and the underlying land which is in fixed supply) leads to prices rising. Rising house prices make banks even more confident about lending further amounts for mortgages (since rising prices mean that they are unlikely to lose money even in the event of a default and repossession). This becomes a highly pro-cyclical process, leading to house price bubbles.

Sovereign money as a solution: There is a need for a number of policy and tax reforms to address the problem of unaffordable housing (particularly in the UK). However, removing the ability of banks to create money will remove much of the fuel for house price inflation. House prices that rise at a lower rate than growth in wages will mean that housing becomes more affordable over time.

8. SLOWING THE RISE IN INEQUALITY

Problem: House price bubbles have the effect of transferring wealth from the young to the old, and from those who cannot get on the property ‘ladder’ to those who can. This is a significant channel through which wealth inequality is further increased.

Furthermore, the fact that the nation’s money supply must be borrowed from banks means that we are having to pay interest on the entire money supply. Household income data surveys show that this has the effect of transferring income from the bottom 90% of the population to the top 10%. (See Chapter 5 of Modernising Money for further details).

Sovereign money as a solution: As discussed above, removing the ability of banks to create money should have a dampening effect on house price rises, which in turn will reduce the rate of growth in wealth inequality.

The creation, by the central bank, of money that has no corresponding interest-bearing debt, means that there is a stock of money that is effectively ‘debt free’, and no need for members of the public to borrow simply to ensure that there is money available in the economy. The resulting lower levels of private debt will mean that less interest is paid overall, and therefore less income is transferred to the top 10% of the population. Again, this will slow the rate of growth in inequality.

MPs lack basic knowledge about the fundamentals of money, leaving them ill-equipped to understand the impending dangers of another house price boom or a second credit bubble, according to an exclusive Dods Monitoring poll commissioned by Positive Money, the campaign body calling for fundamental reform of our money and banking system.

When asked questions about who creates the nation’s money in the UK, nearly three quarters got the wrong answer. 71% of MPs believed that only the government has the power to create money. In reality, the government now only creates coins and notes, which make up just 3% of all the money in the economy. The other 97% of money exists as bank deposits – the electronic numbers in your bank account). This type of money is created by high-street banks – not by the government.

Just over 1 in 10 MP accurately understood that banks create new money every time they make a loan, or that money is destroyed whenever individuals or businesses repay loans.

………….Read the rest of this interesting article from this lPositive Money website link below

And I include just two of the comments here because they reveal some astonishing information about what banks get up to. (you can see the rest when you read the full article via the Positive Money website link above).

simonthorpe • a month ago
One way to illustrate the role played by banks is to look at the amount of Assets that Banks have relative to capital. It is commonly believed that banks can only lend around 10 times their capital. But the most recent figures show that while the 50 largest banks in the world have $67.6 trillion in assets, they only have $722 billion in capital – an overall ratio of about 88 to 1. Indeed, several banks have more than 1000 times more assets than capital (see http://simonthorpesideas.blogs&#8230;
How do they do it? Well, the Basel II and III rules say that when banks create money to lend to AAA to AA- rated governments, such loans have a risk weighting of 0% – meaning that they need no capital at all to make the loans. It’s not surprising that Europe’s governments now owe over $11.4 trillion to the financial system, and that last year European taxpayers paid €365 billion in interest payments, bringing the total amount of interest paid to €6.2 trillion since 1995. These are interest payments made to a financial sector that didn’t even have the money that they lent. (see http://simonthorpesideas.blogs&#8230; )
This insane situation is likely to continue while 7 out of 10 MPs have not understood that when the UK government borrows money from the markets, that money is created out of thin air. Well done Positive Money for showing how ignorant our leaders are.

bankster01 • a month ago
Robert Peston in his book “How do we fix this mess ?” on page 183 I think, says ” Only the bank of England can create money”. This book describes very well how the financial crisis occurred, I have not got to his proposed solutions, which probably mainly involves separating risky investment banks from boring retail banks. He is a top economist and journalist, but in his book he gives no adequate explanation as to how the UK money supply tripled in 10 years from 1997. He seems to imply that central banks created, then lent money at very low rates to the commercial banks who then lent it on to us. Some banks used securitisation, or sold on their existing loans so they could further increase their lending. I do not think over £1 trillion pounds was created in 10 years by the Bank of England for commercial banks to lend on, or a wall of foreign money was used by the commercial banks to increase lending either. The Bank of England has provided cheap credit for schemes like “Funding for lending”, in the hope that commercial banks would lend it on when the economy was on it’s knees, but it was not doing that in the boom years. It was simply all the banks increasing their lending in step, knowing that new deposits would then flow back to them, to support further lending. Peston writes a lot of good stuff, but he implies like a lot of economists that money is just “oil” for the economic machine, when really it is petrol, fuel for the fire.

£90 in the vault was effectively idle. The goldsmith could lend out that extra £90 to borrowers.

However, the borrowers again would choose to use

the paper receipts as money rather than taking out

the metal coins from the bank. This meant that the

bank could issue paper receipts to other borrowers

without necessarily needing to have many—or even

any—coins in the vault.

The banks had acquired the power to create a substitute for money which people would accept as being money. In effect, they had acquired the power to create money: perhaps this is when the goldsmiths became real bankers.

The profit potential drove bankers to over-issue

their paper receipts and lend excessive amounts,

creating masses of new paper money quite out of

proportion to the actual quantity of state-issued

metal money. As it always inevitably will, blowing

up the money supply pushed up prices and destabi-

lised the economy (of the many crises, particularly

galling was the Bank of England having to borrow £2

million from France in 1839). In 1844, the Conserva-

tive government of the day, led by Sir Robert Peel,

recognised that the problem was that they had

allowed the power to create money to slip into irre-

sponsible private hands and legislated to take back

control over the creation of bank notes through the

Bank Charter Act. This curtailed the private sector’s

right to print money (and eventually phased it out

altogether), transferring this power to the Bank of

England.

However, the 1844 Bank Charter Act only addressed

the creation of paper bank notes. It did not refer to

other substitutes for money. With growth in the use

of cheques, the banks had found another substitute.

When a cheque is used to make a payment, the

actual cash is not withdrawn from the bank. Instead,

the paying bank periodically communicates with the

receiving bank to settle any net difference remaining

between them once all customers’ payments in both

directions have been cancelled out against each

other. This means that payments can be made even

if the bank has only a fraction of the money that

depositors believe they have in their accounts.

Following on in the spirit of financial innovation,

after cheques came credit and debit cards, elec-

tronic fund transfers and internet banking. Cheques

are now almost irrelevant as a means of payment

but over 99% of payments[b] (by value) are made

electronically.

Today the electronic numbers in your bank account

do not represent real money. They simply give you a

right to demand that the bank gives you the physical

cash or makes an electronic payment on your

behalf.

In fact, if you and a lot of other customers

demanded your money back at the same time—a

bank run—it would soon become apparent that

the bank does not actually have your money.

For example, on the 31st of January 2007 banks held

just £12.50 of real money (in the form of electronic

money held at the Bank of England) for every £1000

shown in their customers’ accounts. Even among

those who are aware that what banks do is more

complicated than merely operating as middlemen

between savers and borrowers, there is a wide-

spread belief that banks are obliged to possess a

sum corresponding to a significant fraction of their

liabilities (their customers’ deposits) in liquid assets,

i.e. in cash or a form that can be rapidly converted

into cash. In fact, such laws were emasculated in

the 1980s in response to lobbying from the industry

(although some effort is now being made to

re-impose such rules in the aftermath of the crisis).

When a run starts (like the one on Northern Rock

on the 14th September 2007) it becomes almost

impossible to stop.

Once the bank has paid out any cash which it holds in the branch to individuals (and transferred all of its reserves to other banks) other depositors will have to wait for the bank to sell off its remaining assets before they see their money.

And because the bank has to sell these assets

quickly, it will find it hard to receive a fair price.

Because of this it is unlikely the proceeds from these

sales will cover the value of their deposits and other

liabilities, and therefore most customers are likely to

lose a large proportion of their savings. Because this

type of personal ruin is a tragedy and, even more

importantly, because one bank run is likely to lead

to others (as confidence in the banking system falls

through the floor) the government insures deposits,

guaranteeing some level of payback in the event of

bank failure. Thus, because the system is inherently

unstable, and because almost all of our money

exists on banks’ balance sheets, the banking sector

has to be underwritten and rescued by the taxpayer,

all as a result of the failure of legislation to keep up

with technology and financial innovation since 1844.

******

When money is created, it can be put into the

economy in two ways: it can either be spent in

exchange for goods and services or lent out. When

banks create money, they put most of it into the

economy through lending. Exactly who this newly-

created money is given to is crucial because it will

determine the shape of the economy.

Over the decade leading up to the 2008 financial

crisis, the amount of money lent out by banks

tripled but this steep rise is largely accounted for by

loans advanced for the purposes of buying property

and for financial speculation. The amount dedicated

to productive investment remained more or less

constant throughout this period meaning that the

proportion of the money supply that was dedicated

to enhancing production steadily waned.

*****

Between November 1982 and November 2006 the

banking sector increased the money supply—by

creating new money through lending—by an

average of 10% a year.

Between November 2007 and November

2008, £258 billion of new money was created. If

government were to increase the money supply

at this rate, it would be accused of following the

policies of Zimbabwe, but because few people

understand that banks create money via lending,

this is completely overlooked.

This huge growth in the money supply is hardly

surprising when we consider the incentives that

banks have to increase their lending. In confident

times, all of a banker’s incentives push him to

lend as much as possible: by lending more, they

maximise short-term profits and, more specifically

their own bonuses, commissions and prospects

of promotion and profits. There is no reward for

bankers who are prudent and choose not to lend

or only lend judicious sums. In short, the supply

of money into the economy depends on the confi-

dence and incentives of bankers rather than what is

best for society as a whole.

Investing in machinery to make factories

more efficient is productive investment whilst

lending to buy existing property through mortgages

is non-productive as it simply pushes up house

prices without increasing production.

The £1.16 trillion of new money created by

the banks over the last ten years could have been

used to: pay off the national debt (which currently

stands at around £977 billion); invest in public

transport, hospitals, schools or renewable energy;

or exempt the poorest ten per cent of the popula-

tion from tax. Instead, it has been used by the

banking sector to fuel a housing bubble that has

made buying a home unaffordable for all but the

very rich.

The last few years have proven the business model that enables banks to create money is fundamentally unstable, requiring rescue by the government from time to time.

When this happens, taxpayer funds are diverted

from public spending and spent on salvaging failing

corporations. This further reduces the power of

government to do what it was democratically

elected to do, weakening democracy in the process.

By handing the power to create money over to

the banks, the government reduces its revenue,

compromises its capacity to carry out the activities

that it has been mandated to carry out and under-

mines the potential of the democratic system to

change society for the better.

THE HIDDEN TAX THAT BANKS POCKET

Giving banks the power to create money results in

two hidden and undemocratic ‘taxes’ being levied

on the public.

The first of these ‘taxes’ is inflation, when increases

in the amount of money in the economy feed

through into higher prices. If the money supply

is increased quickly then the new money pushes

up prices, especially in housing to where much of the new lending is destined.

Of course, it is now banks that create the vast

majority of new money. They have increased the

amount of money in the economy at an average of

10% a year between 1981 and 2007, (by lending)

and pumped this money mainly into the housing

market.

As a result, house prices shot out of the

reach of ordinary people, whereas those who got

the ‘first use’ of the money (by borrowing first)

received most of the benefit. Meanwhile those who

were not already on the housing ladder became

significantly poorer, in real terms, because the

relative cost of housing doubled in just 10 years

(between 1997 and 2007).

Consequently, the inflation caused by allowing banks to create money is also effectively a ‘tax’ accruing to the banks (through their increased interest income on ever greater mortgages) and those who borrow early on (to buy property and other assets).

Click here to see chart showing proportion of money created by banks via loans they make

NO ACCOUNTABILITY TO CUSTOMERS

Unlike pension funds, banks are not required to

disclose how they will use their customers’ money.

As 97% of the UK’s money supply is effectively held

with banks, this allows them to allocate a larger

sum of money than either the entire pension fund

industry or the elected government itself. Conse-

quently the UK economy is shaped by the invest-

ment priorities of the banking sector, rather than

the priorities of society.

Just five banks hold 85% of the UK’s money, and

these five banks are steered by just 78 board

members whose decisions shape the UK economy.

This is a huge amount of power concentrated in very

few hands, with next to no transparency or account-

ability to wider society.

******

It is common knowledge that anyone found printing

their own bank notes can expect to find the police

kicking down the door at two o’clock in the morning.

However, it has only been illegal for individuals and

companies to create their own £5 or £10 notes since

1844.

Prior to 1844, the state had a legal monopoly only

over the creation of metal coins dating from the

time when this had been the only form of money.

But keeping lots of metal and carrying it around was

inconvenient so customers would typically deposit

their metal coins with the local jeweller or goldsmith

who would have secure storage facilities. Eventually

these goldsmiths started to focus more on holding

money and valuables on behalf of customers rather

than on actually working with gold, and thereby

became the first bankers.

A customer depositing coins would be given a piece

of paper stating the value of coins deposited. If the

customer wanted to spend his money, he could take

the piece of paper to the bank, get the coins back,

and then spend them in the high street. However,

the shopkeeper who received the coins would then

most likely take them straight back to the bank. To

avoid this hassle, shopkeepers would simply accept

the paper receipts as payment instead. As long as

the bank that issued the receipts was trusted, busi-

nesses and individuals would be happy to accept the

receipts, safe in the knowledge that they would be

able to get the coins out of the bank whenever they

needed to.

Over time, the paper receipts came to be accepted

as being as good as metal money. People effectively

forgot that they were just a substitute for money

and saw them as being equivalent to the coins.

The goldsmiths then noticed that the bulk of the

coins placed in their vaults would be gathering dust,

suggesting that they were never being taken out.

In fact, only a small percentage of all the deposits

were ever being claimed at any particular time. This

opened up a profit opportunity—if the bank had

£100 in the vault, but customers only ever withdrew

a maximum of £10 on any one day, then the other

£90 in the vault was effectively idle. The goldsmith could lend out that extra £90 to borrowers.

However, the borrowers again would choose to use

the paper receipts as money rather than taking out

the metal coins from the bank. This meant that the

bank could issue paper receipts to other borrowers

without necessarily needing to have many—or even

any—coins in the vault.

The banks had acquired the power to create a substitute for money which people would accept as being money. In effect, they had acquired the power to create money: perhaps this is when the goldsmiths became real bankers.

The profit potential drove bankers to over-issue

their paper receipts and lend excessive amounts,

creating masses of new paper money quite out of

proportion to the actual quantity of state-issued

metal money. As it always inevitably will, blowing

up the money supply pushed up prices and destabi-

lised the economy (of the many crises, particularly

galling was the Bank of England having to borrow £2

million from France in 1839). In 1844, the Conserva-

tive government of the day, led by Sir Robert Peel,

recognised that the problem was that they had

allowed the power to create money to slip into irre-

sponsible private hands and legislated to take back

control over the creation of bank notes through the

Bank Charter Act. This curtailed the private sector’s

right to print money (and eventually phased it out

altogether), transferring this power to the Bank of

England.

However, the 1844 Bank Charter Act only addressed

the creation of paper bank notes. It did not refer to

other substitutes for money. With growth in the use

of cheques, the banks had found another substitute.

When a cheque is used to make a payment, the

actual cash is not withdrawn from the bank. Instead,

the paying bank periodically communicates with the

receiving bank to settle any net difference remaining

between them once all customers’ payments in both

directions have been cancelled out against each

other. This means that payments can be made even

if the bank has only a fraction of the money that

depositors believe they have in their accounts.

Following on in the spirit of financial innovation,

after cheques came credit and debit cards, elec-

tronic fund transfers and internet banking. Cheques

are now almost irrelevant as a means of payment

but over 99% of payments[b] (by value) are made

electronically.

Today the electronic numbers in your bank account

do not represent real money. They simply give you a

right to demand that the bank gives you the physical

cash or makes an electronic payment on your

behalf.

In fact, if you and a lot of other customers

demanded your money back at the same time—a

bank run—it would soon become apparent that

the bank does not actually have your money.

For example, on the 31st of January 2007 banks held

just £12.50 of real money (in the form of electronic

money held at the Bank of England) for every £1000

shown in their customers’ accounts. Even among

those who are aware that what banks do is more

complicated than merely operating as middlemen

between savers and borrowers, there is a wide-

spread belief that banks are obliged to possess a

sum corresponding to a significant fraction of their

liabilities (their customers’ deposits) in liquid assets,

i.e. in cash or a form that can be rapidly converted

into cash. In fact, such laws were emasculated in

the 1980s in response to lobbying from the industry

(although some effort is now being made to

re-impose such rules in the aftermath of the crisis).

When a run starts (like the one on Northern Rock

on the 14th September 2007) it becomes almost

impossible to stop.

Once the bank has paid out any cash which it holds in the branch to individuals (and transferred all of its reserves to other banks) other depositors will have to wait for the bank to sell off its remaining assets before they see their money.

And because the bank has to sell these assets

quickly, it will find it hard to receive a fair price.

Because of this it is unlikely the proceeds from these

sales will cover the value of their deposits and other

liabilities, and therefore most customers are likely to

lose a large proportion of their savings. Because this

type of personal ruin is a tragedy and, even more

importantly, because one bank run is likely to lead

to others (as confidence in the banking system falls

through the floor) the government insures deposits,

guaranteeing some level of payback in the event of

bank failure. Thus, because the system is inherently

unstable, and because almost all of our money

exists on banks’ balance sheets, the banking sector

has to be underwritten and rescued by the taxpayer,

all as a result of the failure of legislation to keep up

with technology and financial innovation since 1844.

******

When money is created, it can be put into the

economy in two ways: it can either be spent in

exchange for goods and services or lent out. When

banks create money, they put most of it into the

economy through lending. Exactly who this newly-

created money is given to is crucial because it will

determine the shape of the economy.

Over the decade leading up to the 2008 financial

crisis, the amount of money lent out by banks

tripled but this steep rise is largely accounted for by

loans advanced for the purposes of buying property

and for financial speculation. The amount dedicated

to productive investment remained more or less

constant throughout this period meaning that the

proportion of the money supply that was dedicated

to enhancing production steadily waned.

*****

Between November 1982 and November 2006 the

banking sector increased the money supply—by

creating new money through lending—by an

average of 10% a year.

Between November 2007 and November

2008, £258 billion of new money was created. If

government were to increase the money supply

at this rate, it would be accused of following the

policies of Zimbabwe, but because few people

understand that banks create money via lending,

this is completely overlooked.

This huge growth in the money supply is hardly

surprising when we consider the incentives that

banks have to increase their lending. In confident

times, all of a banker’s incentives push him to

lend as much as possible: by lending more, they

maximise short-term profits and, more specifically

their own bonuses, commissions and prospects

of promotion and profits. There is no reward for

bankers who are prudent and choose not to lend

or only lend judicious sums. In short, the supply

of money into the economy depends on the confi-

dence and incentives of bankers rather than what is

best for society as a whole.

Investing in machinery to make factories

more efficient is productive investment whilst

lending to buy existing property through mortgages

is non-productive as it simply pushes up house

prices without increasing production.

The £1.16 trillion of new money created by

the banks over the last ten years could have been

used to: pay off the national debt (which currently

stands at around £977 billion); invest in public

transport, hospitals, schools or renewable energy;

or exempt the poorest ten per cent of the popula-

tion from tax. Instead, it has been used by the

banking sector to fuel a housing bubble that has

made buying a home unaffordable for all but the

very rich.

The last few years have proven the business model that enables banks to create money is fundamentally unstable, requiring rescue by the government from time to time.

When this happens, taxpayer funds are diverted

from public spending and spent on salvaging failing

corporations. This further reduces the power of

government to do what it was democratically

elected to do, weakening democracy in the process.

By handing the power to create money over to

the banks, the government reduces its revenue,

compromises its capacity to carry out the activities

that it has been mandated to carry out and under-

mines the potential of the democratic system to

change society for the better.

THE HIDDEN TAX THAT BANKS POCKET

Giving banks the power to create money results in

two hidden and undemocratic ‘taxes’ being levied

on the public.

The first of these ‘taxes’ is inflation, when increases

in the amount of money in the economy feed

through into higher prices. If the money supply

is increased quickly then the new money pushes

up prices, especially in housing to where much of the new lending is destined.

Of course, it is now banks that create the vast

majority of new money. They have increased the

amount of money in the economy at an average of

10% a year between 1981 and 2007, (by lending)

and pumped this money mainly into the housing

market.

As a result, house prices shot out of the

reach of ordinary people, whereas those who got

the ‘first use’ of the money (by borrowing first)

received most of the benefit. Meanwhile those who

were not already on the housing ladder became

significantly poorer, in real terms, because the

relative cost of housing doubled in just 10 years

(between 1997 and 2007).

Consequently, the inflation caused by allowing banks to create money is also effectively a ‘tax’ accruing to the banks (through their increased interest income on ever greater mortgages) and those who borrow early on (to buy property and other assets).

The Bishop of Durham is right to condemn the extortionate rates of interest extracted from those too poor to have bank accounts (The Journal, May 14). However, he should look further, and ask why it is that government, businesses and families are all so deeply in debt to the banks.

As Professor Richard Werner of Southampton University explains in an easy-to-understand series of six short videos, when a nation relies on compound interest-bearing loans from the commercial banks to their customers for its means of exchange, money effectively is debt.

With those barely able to avoid the pay-day money-lenders using their portfolio of credit cards to pay the rent, it seems that we are now so saturated with this chronic, systemic debt that we can absorb no more: but unfortunately, when money is debt, paying off the debt means that the money supply shrinks.

The solution is not austerity, but Keynes without the borrowing: that is to say, a money supply created entirely by public authority, but without generating an equal quantity of debt at source.

If notes and coins can be produced as a public utility, and sold to the high-street banks at a profit of some billions to the nation, why not the digital money which now forms around 97% of our means of exchange?

There is absolutely no reason why increasing numbers of people should be forced to lay down their solvency on behalf of their country just to keep money in circulation. It’s time we took money-lending out of the money-creation equation, as proposed by Positive Money in the Bank of England (Creation of Currency) Bill, which already has the support of far-sighted MPs on both sides of the House. (more…)